AMARILLO, TX – Increasingly, we are seeing hospitals and DME suppliers work together. From the hospital’s standpoint, it is important that discharged patients do not become “frequent flyers” (i.e., patients who are readmitted soon after discharge). Under the Hospital Readmissions Reduction Program, a hospital can be financially penalized by Medicare if the hospital has patients (i) who are admitted for a particular disease (e.g., COPD), (ii) who are discharged, and (iii) who are readmitted in less than 30 days for the same disease.

DME suppliers are uniquely positioned to take care of patients’ needs after they are discharged. Unlike most other providers, DME suppliers visit patients’ homes and are in regular contact with patients, their caregivers, and their treating physicians. Recognizing the ability of DME suppliers to work with patients post-discharge, hospitals are reaching out to DME suppliers to enter into arrangements that will facilitate the DME suppliers providing post-discharge services to patients. Set out below is a discussion of these arrangements.

• Preferred Provider Agreement (“PPA”) – A PPA will be signed by a hospital and a DME supplier. The PPA will state that subject to patient choice, the hospital will refer patients to the DME supplier. The DME supplier will commit to provide excellent services to the patients…with the goal of improving/maintaining the health of patients post-discharge. No remuneration will paid under the PPA.
• Employee Liaison – The DME supplier will assign an employee to be on the premises of the hospital. The liaison will facilitate the transition of the patient to DME services in the patient’s home. The liaison cannot perform services that the hospital is obligated to perform. Doing so will result in “something of value” to a referral source…thereby implicating the federal anti-kickback statute (“AKS”).
• Equipment Consignment Agreement (“ECA”) – An equipment consignment arrangement is also known as a “loan closet arrangement” and a “stock and bill” arrangement. Under an ECA, the DME supplier will place equipment in the hospital. If a patient decides to obtain equipment from the supplier post-discharge, a hospital employee will provide the DME supplier’s equipment to the patient. The patient will take the equipment home and the DME supplier will assume post-discharge DME services.
• Management Agreement (“MA”) – In this scenario, the hospital system will own 100% of its DME business. The DME supplier will provide management services to the hospital-owned DME business.
• Lease Agreement – The DME supplier will open up a new location on the hospital premises. The DME supplier will make lease payments to the hospital.
• Joint Venture (“JV”) – A JV arises when two or more parties own something together. For example, ABC Medical Equipment, Inc. (“ABC”) and St. Mary’s Hospital (“hospital”) can create a new legal entity jointly owned by ABC and the hospital. For purposes of this article, assume that the entity is called “St. Mary’s Medical Equipment, Inc.” (“SMME”). Even though the hospital is a non-profit entity, SMME can be a for-profit subsidiary of the hospital. And even though the hospital is a Medicare “participating provider,” SMME can be a Medicare “non-participating provider.” As a non-participating provider, SMME can (on a patient-by-patient basis) elect to either (i) take assignment and bill traditional Medicare or (ii) not take assignment, require the patient to pay out-of-pocket, and then submit a claim to traditional Medicare for it to reimburse the patient.
• The ownership breakdown can be as agreed upon by the hospital and ABC (50-50, 60-40, 70-30, etc.). For the purposes of this article, assume that the hospital and ABC own SMME on a 50-50 basis.
• SMME will (i) obtain state DME licensure, (ii) obtain a surety bond, and (iii) become accredited as a DME supplier. After completing these steps, SMME will obtain (i) a Medicare Part B supplier number (“PTAN”) and (ii) a state Medicaid provider number. Subsequently, SMME will sign Medicare Advantage and Medicaid Managed Care contracts.
• When a patient is about to be discharged from the hospital, and if the physician orders DME to be used in the patient’s home, the hospital will ask the patient if he/she has a preference for a DME supplier. If the patient expresses a preference, the patient’s choice will be honored. If the patient does not express a preference, then he/she can be referred to SMME.
• SMME will pay rent to the hospital. The hospital can provide services to SMME, for which SMME will pay fair market value (“FMV”) compensation. ABC can also provide services to SMME, for which SMME will pay FMV compensation. However, ABC should not manage SMME on a turnkey basis. SMME will need to be an independent business with operational responsibilities and financial risk.
• SMME needs to be structured and operated in a way that it does not implicate the AKS. The hospital will refer federal health care program (“FHCP”) patients to SMME. If the JV is structured in such a way that it is a “sweetheart deal” for the hospital, then ABC will be construed as giving “something of value” to a referral source, thereby triggering the AKS. Ideally, the JV will be structured to comply with the Small Investment Interest safe harbor to the AKS. However, it is difficult for most JVs to comply with this safe harbor. If the Small Investment Interest safe harbor cannot be met, then the JV will need to comply with the Office of Inspector General’s (“OIG’s”) (i) 1989 Special Fraud Alert (“Joint Ventures”), (ii) April 2003 Special Advisory Bulletin (“Contractual Joint Ventures”), and (iii) recent Advisory Opinions.
• For example, assume that the initial capitalization is $150,000. Each owner will need to contribute $75,000. The hospital and ABC will each be obligated to contribute 50% of future capital contributions.
• The hospital will be entitled to 50% of the profits of SMME, regardless of how many (or how few) referrals that the hospital sends to SMME.
• Although the hospital may refer patients to SMME, the hospital will not be required to do so.

Important Goals of a JV
The JV will want to achieve a number of goals. First, physicians and hospital employees (nurses, discharge planners, etc.) need to desire to refer patients to SMME. There have been many instances in which hospitals own 100% of a DME business, or own a portion of a DME business, and the service/responsiveness of the DME business is so poor that the physicians/staff refer patients to outside DME suppliers. By avoiding this problem, one large step towards success will be achieved.

Second, SMME cannot simply deliver equipment to discharged patients and cease working with the patients. It is important that SMME work with its patients with the goals of (i) improving the patients’ health and (ii) reducing the risk of the patients being readmitted soon after discharge. By providing ongoing service to its DME patients, SMME will (i) reduce the incidences of “frequent flyers”…that will, in turn, save the hospital money and (ii) reduce the outlay of money by Medicare and other third-party payors (“TPPs”). It will be important for SMME to document its success in reducing readmissions. This documentation can be shared with TPPs.

Third, SMME will be subjected to post-payment audits by Medicare and other TPPs. A goal will be for SMME to be successful in responding to audits. Success can be measured by the dollar amounts that SMME is required to repay. It is likely that SMME will be required to repay money to TPPs as a result of audits. The key is for the repayment amounts to be as low as possible.

Fourth, while it is expected that SMME will be subjected to DME MAC audits, RAC audits and CERT audits, it will be important for SMME to avoid being subjected to UPIC audits. This is because UPIC audits are triggered by the DME MAC (or other governmental or quasi-governmental entity) concluding that a likelihood of fraud exists.

Fifth, SMME should conduct surveys of physicians and hospital staff to determine what they like…and do not like…about using SMME. It is important that SMME’s operations are efficient so as to make the physicians’/staff members’ tasks easier.

Lastly, SMME should maintain records that address (i) the number of patients readmitted soon after discharge before SMME was formed vs. (ii) the number of patients readmitted soon after discharge after SMME was formed. These records will measure SMME’s success in providing after-discharge care to its DME patients.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, a law firm with a national health care practice based in Texas. He represents pharmacies, infusion companies, HME companies, manufacturers, and other health care providers throughout the United States. Mr. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization and can be reached at (806) 345-6320 or [email protected].